Last week, the Alaska Dept. of Health and Social Services released an RFP to help support the re-design of Medicaid. The RFP included language stating:

The reform initiative is intended to contain both a private option and work requirements. The base approach of the initiative is to combine a private option for the Medicaid program with elements that will ensure cost savings and cost control. The proof of concept analysis should include discussion of a block grant as an option to fulfill these objectives; and whether items outside of the Medicaid program, such as the use of referenced-based rates in the private market, could be used to enhance the redesign concept.”

This follows on the footsteps of governor-requested legislation that was dropped late in the 90-day session, asking for waiver authority to move certain Medicaid beneficiaries into the individual market. From SB 112:

“The Department of Health and Social Services shall amend and apply for a section 1115 waiver under 42 U.S.C. 1315(a) to provide coverage through the individual marketplace for individuals who are or may become eligible for medical assistance,” meaning Medicaid.

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There are two significant reasons why this approach – moving Medicaid beneficiaries into the private market – could have significant cost increases compared to the status quo. In talking with stakeholders, it’s not clear either of these elements were taken into consideration.

1. Most of these beneficiaries cost the state next to nothing right now.

Here’s how that works. First, 66% of all 215,000 Alaska Medicaid beneficiaries are mothers or fathers and their children. These are relatively healthy, relatively young Alaskans that are on Medicaid as a result of their income, rather than their health status. They just aren’t that sick, and they are low utilizers of the health care system. So, if they use services – often they don’t – the services they use are relatively inexpensive primary care services.

I mention this because it’s this group that the state is talking about moving into a “private option” onto the individual market. Today, because the state covers and pays for these beneficiaries directly, and not through a managed care model, when those beneficiaries don’t use services, nothing is paid out. The state pays nothing.

Sure, the average Medicaid beneficiary might cost $11k/year in Alaska. But that’s the average. If 66% of your pool, or two out of three, doesn’t use services, they still cost next to nothing. The third person, the high cost person, would cost a lot, skewing the average upwards. In this example, the third person would cost $33k/year to make the average of the three cost $11k/year.

By moving mothers and fathers with their kids into the “private market” or individual market, the state will need to cover the cost of their premiums. In other words, the state will need to start paying the insurance premiums to ensure these Medicaid beneficiaries have coverage. They’ll start paying $11k/year (probably less, given categorical cost accounting) to a health plan to cover them. But, they still aren’t likely to use much in the way of services. Meanwhile, the state will retain the expensive person.

So, in this instance, in the new model, the state will pay $33k/yr for the expensive beneficiary, and start paying premiums of $11k/year (or some number lower) to the private market. That’s $55k, or a 67% increase in costs just by making this administrative change.

Even at a lower premium, which should be likely, the state will pay for the plan administration and some premium for services regardless of utilization. Looking to the Lower 48, this cost might be the $4000/year for Medicaid beneficiaries. That’s still $4k x 2 beneficiaries that the state would need to start paying that it’s currently not paying for now. It’s a step backwards financially, and we’ve only just begun.

2. Care in the “private” market costs more.

When the State of Alaska does pay for care for these beneficiaries, it pays a Medicaid rate. That’s high in Alaska, compared to other states, but it’s still much lower than commercial rates in the “private” or individual market.

So, what that means is that Alaska will be paying for services at a higher rate than if they hadn’t made any change at all. Sure, they’ll be paying through an intermediary plan, and technically that private plan will have the risk. But CMS will require “actuarially sound” rates for this to happen. What that means is that the new, higher reimbursement for services will result in a higher overall premium that the State of Alaska will need to pay to a plan in order to finance this model.

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Bottom line: It’s clear DHSS is working hard to come up with ideas and models that can save the state money. They should be commended for trying to sort through some unique and interesting models.

However, it’s important that the models get fully vetted so that the state can sidestep any possible implications or consequences that might have negative fiscal impacts.